How A Combo Tax Package Is Keeping The Markets Happy
The Diwali gift as the prime minister called it in his Independence Day speech last Friday is seen as the largest tax overhaul since 2017
On Episode 657 of The Core Report, financial journalist Govindraj Ethiraj talks to Anshuman Magazine - Chairman & CEO, India, SEA, MEA, CBRE as well as Paul Hickin, Chief Economist and Editor-in-Chief Petroleum Economist.
SHOW NOTES
(00:00) Stories of the Day
(00:50) How a combo tax package is keeping the markets happy
(04:13) Corporate earnings on Wall Street continue to surprise
(05:58) US trade advisor Peter Navarro wants India to stop acting as a clearing house for Russian oil
(14:35) Commercial real estate is on a roll, what’s driving it?
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Tuesday, the 19th of August and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital and recovering from a day of intense rain and possibly some newer records.
Our top stories and themes,
How a combo tax package of income tax relief and lower prices is keeping the markets happy for now.
Corporate earnings on Wall Street are continuing to surprise.
U.S. trade advisor Peter Navarro wants India to stop acting as a clearinghouse for Russian oil. Can it?
Commercial real estate is on a roll and what's driving that?
The Markets Are Happy For Now
So the question is, what is the package amounting to? So the markets have already factored in an income tax relief announced in the union budget 2025, that's earlier this year, which exempts incomes up to 12 lakh rupees a year or about a lakh of rupees a month from paying tax.
Now, that's obviously putting money into the hands of many income tax payers. Now, this was widely expected to add to incomes and boost consumption. Now, whether that's happened in the way it was desired is not clear, but the latest move on the spending side, which we've been discussing should definitely help because after all, only about 23 million Indians actually pay income tax, though many more file income tax returns.
Now, with goods and services tax set to be reduced, prices of a host of products that you and I buy every day and otherwise should drop even as rates get rationalised to key categories of 5 percent and 18 percent, as opposed to four categories, including 12 percent and 28 percent. Now, the Diwali gift, as the Prime Minister Narendra Modi called it in his Independence Day speech last Friday, is seen as the largest tax overhaul since 2017, which is when GST was launched. Consumer products and cars are amongst the beneficiaries and white goods as well if the proposals by the central government go through.
The states also have to agree in their joint GST council meeting that's coming up in a couple of weeks. The government has suggested lowering GST on small petrol and diesel cars to 18 percent from the current 28 percent, according to Reuters. Small cars make up roughly 30 percent of the 4.3 million cars sold in India, which is also the world's third largest automobile market.
Consumption tax on health and life insurance premiums may also come down or even nothing from 18 percent, according to sources quoted by Reuters. Now, the combination of an increase in income for some and a decrease in prices for many does augur well overall for the consumption economy. Those same goods would continue to attract a 40 percent rate, which would include tobacco and aerated beverages, apart from, of course, cars.
Now, in the markets, shares of Maruti Suzuki were up 9 percent on Monday, which led, among other things, to the nifty, rising about 1.3 percent, its best day in three months. So just to come back to small cars, which have been slowing down considerably because of income pressures, are usually defined as those having engine capacity below 1,200 cc for petrol and 1,500 cc for diesel and not longer than four metres. Back to the markets, the indices were up thanks to those imminent goods and services tax or GST price cuts and a larger sense of macroeconomic bliss, at least relatively.
Remember, Standard & Poor's also raised India's ratings to BBB from BBB- and that was after 18 years. At close, the Sensex was up 676 points to 81,274. The nifty 50 was up 246 points to 24,877, though it did cross for a moment the 25,000 mark on Monday.
This is also nifty's best day since June 26th. In the broader market, the nifty mid-cap and small-cap indices were up 1.5 percent each. It would appear that after decades, perhaps, Indian consumers can start seeing lower prices of many aspirational goods, which could also include items like alcohol when the UK-India free trade agreement kicks in, likely within a year, and of course, other products imported from the United States to which we are committed to have zero percent or very low import duties, even as our negotiations continue.
And now, Indian earnings might be muted, but for what it's worth, Wall Street is doing fine, as reflected in the new records that the S&P 500 is hitting, and other indices on Wall Street are hitting almost every day now. The Wall Street Journal reports that with the latest earnings season nearly done, top and bottom line results for companies in the S&P 500 are beating expectations, which had been lowered after President Trump announced sweeping duties on imports in April. Profits are expected to have risen about 12 percent in the second quarter from a year earlier, according to FactSet, far ahead of the 5 percent growth analysts predicted in early July.
Now, much of that earnings growth has been driven by tech companies, but corporate chiefs, according to the Wall Street Journal, have sounded more optimistic about the economy than they did in the spring, and earnings calls, including the world recession, have fallen 84 percent, according to Alpha Sense, quoted by the WSJ. Elsewhere, the rupee was also up as stock markets rose. The rupee was at Rs.
87.35 against the US dollar, up 0.23 percent from Rs. 87.55 in the previous session, according to Reuters. World markets, and for that matter, even trading partners like India, will wait to see what happens on the Ukraine-Russia front, even as Ukraine President Volodymyr Zelensky, along with several European leaders, meets with President Trump overnight.
The question is to what extent Ukraine will accept a truce deal from Russia via the United States, and of course, whether that could be trusted.
A Fresh Oil Spat
It's not about hitting where it hurts, but it's about hitting who it hurts, it would appear. Oil prices rose on Monday after White House Trade Advisor Peter Navarro said India's purchases of Russian crude were funding Moscow's war in Ukraine and had to stop.
That is the reason we are staring at an additional 25 percent tariff, which could kick in on the 27th of August if India were to not stop buying Russian oil. Meanwhile, Brent crude futures were up to about $66.15 a barrel on Monday morning, and West Texas intermediate crude was about $63.19 a barrel. Writing in the Financial Times, Navarro described India's dependence on Russian oil as opportunistic and said that if India wants to be treated as a strategic partner of the U.S., it needs to start acting like one.
In effect, he said, India acts as a global clearinghouse for Russian oil, converting embargoed crude into high-value exports while giving Moscow the dollars it needs. His comments also come after trade negotiations between the U.S. and India, which were supposed to take place in Delhi later this month, have been reportedly called off. India has, of course, pointed out in the past that its Russian oil imports were driven by economic and not political compulsions and aimed at keeping energy prices under control for hundreds of millions of Indians.
Moreover, Europe and the U.S. also import various products from Russia. So what does all of this mean from an oil markets point of view? I spoke with Paul Hickens, chief economist and editor-in-chief of London-based Petroleum Economist, and I began by asking him how he was reading the comments by Peter Navarro and how that could affect oil markets and through the India lens.
INTERVIEW TRANSCRIPT
Paul Hickin: First of all, India's not the biggest buyer of Russian oil, it's China. It's interesting that India's been targeted because obviously it's not just about Russian oil, this situation, it's about wider deals, wider strategic and trade deals and pressure. But yes, if we look at it, China's the biggest buyer, around 46% of Russian oil, and then India comes second as around the 36% mark.
And they're the two biggest, biggest buyers of Russian oil. And gotta go back to where, you know, three or four years ago when India barely bought any Russian oil. So in terms of where India could go, well, yes, India could pivot back.
It may take them a little while, but India could pivot back. It wasn't buying Russian oil several years ago, and it could well go back to that case. Middle East crude is still plentiful, available, US as well.
Crude quality does matter to India refiners, but at the same time, it could pivot back. It may take a little bit of while. The ramifications, if there was some follow through on this pressure, would be huge, not just for India, but for global oil markets, because you'd then have to raise questions around who would be buying the loss of India oil?
What's that mean? Obviously, it means Indian refineries would be buying at a higher price. You'd argue that probably China is only one of the only countries that could take more of that, and it puts a lot of power into China's hands in terms of its buying power over Russia.
And so, there's a lot of geopolitical strands to this, a lot of geoeconomics and price moves to this. I think we've still got a long way to go before, given the comments today in the op-ed, I think it's still a long way to go between those threats and what we see as talk and what actually happens in practise as well. Not to diminish or dismiss the threats that are coming, they are definitely credible, but I think we've seen with Trump in the past, there's always a deal to be had, there's always an arrangement to be done.
And I think there's always these stark positions to begin with, and then some kind of agreement comes together. So, I think that's where we're at right now.
Govindraj Ethiraj: Right. Okay. So, let me focus on the refined product.
So, where he talks about Peter Navarro again, talks about India exporting refined product, which India has been doing to Europe, and of Russian crude, or maybe a good part of it is Russian crude. So, what is that market looking like? And is that something that India could also find other buyers for, or is this more tight in a manner of speaking?
Paul Hickin: It's certainly tight. I mean, this is a big question because you're right, Europe buys a lot of diesel, a lot from India, a lot of jet, the distillate market, which is the diesel and the jet fuel market. Globally, it's a very tight market.
And if he was to squeeze that and the Indian refiners weren't able to process the crude and get the same sort of product yields as the diesels, which Europe wants. Secondly, where Europe would go, this has huge ramifications in terms of freight, in terms of cost of products going through the roof. We all know, again, going to the backdrop of this, we all know that Trump does not want high oil prices.
That's one of his clear mandates. So, it will be interesting to see how he negotiates, navigates that route in terms of putting the pressure on and what would really happen. The same for Europe as well.
I mean, when you look at these kind of the geopolitics of the risk one side and the actual costs on the other, practical buying costs on the other, and those two are going to collide if those threats become reality, that Europe won't want to pay more. And it'll be a trade-off between how much is prepared to unsettle or go against the US and the same for India via what's in its own economic best interest. So, again, with how much these tariffs have come on and whether there's this back and forth that you might see and where the actual middle point ends up on all this because it's very complicated right now and very unclear where it's going to go.
Govindraj Ethiraj: Right. And what's your outlook like given all of this? I know there are a bunch of geopolitical factors that are hanging that are changing every 24 hours.
But if you were to keep that aside for a moment to the extent that we can, what are the other demand supply trends that you're seeing right now?
Paul Hickin: Yeah, so I think it's really interesting because on one level, the economies of the big ones like China and the US and obviously India, but probably more so talk about China and US are being more uncertain about their outlooks. They're holding up reasonably well. Now, there is some signs that China's continues could be in this slow, slowly weakening trajectory.
And what I would say is you see the diversity and the polarity and opinions from two of the big energy agencies, the IEA, which just has oil demand at 0.7 million barrels a day and OPEC, which has 1.2, 1.3 million barrels a day. And that big gap shows that uncertainty in the market. I think from petroleum economists perspective, we see probably around a million barrels a day.
So it's somewhere in the middle. I think there is still enough of demand holding up, which provides some support to the market going into the second half of the year. I see prices probably weakening further, all else being equal, but oil prices probably weakening towards the $60 and maybe a little bit below the $60 a barrel mark.
But I don't think it's going to weaken too much below because if you look at the supply side and US is sort of this sort of prices, and especially with WTI being a bit lower than that, US shale, US productions sort of doesn't really grow. It starts to really hit US production and we don't really see much growth in US production this year. And then you've got some strength in Brazil and Guyana, which should help some on the supply side.
And I know that there's been some in the market. We talk about this sort of big supply side if you add US in. Really then the question relies on how much is OPEC plus going to bring to the market in the second half.
We've seen this big unwinding since April of OPEC plus, or at least of those core eight members, which were taking on an extra voluntary set of cuts. And we've seen that unwind. And now we'd like to see some kind of pause and reflection.
So it'd be a real question of how much OPEC will tolerate and continue to bring back barrels or whether it may reverse course or keep things as it is. And that's a function partly of market stability, which in most parlance would be read as price and probably 60-65 is probably as much as OPEC plus will want to tolerate.
Govindraj Ethiraj: Paul, we've run out of time. Thank you so much for joining me.
Paul Hickin: Thank you very much.
How GCCs And Return To Work Is Boosting India's Commercial Real Estate
Goldman Sachs opened a new office in Mumbai even as it expands its core investment banking business in India beyond its massive global capability centres or GCCs in Hyderabad and Bangalore, which opened in 2004 and 2021.
That's Bangalore in 2004 and Hyderabad in 21, and employs something like 9,000 professionals across the two cities. And that also makes them or makes it the second largest presence of Goldman Sachs globally. Now back to Mumbai, the new office in Worli is 50% larger than its previous location in the city.
Bloomberg quoted the bank saying, adding that it takes up more than 70,000 square feet of prime real estate in central Mumbai. Last week, Apple signed a lease for about 270,000 square feet in Sankhi Road in Bangalore, and the 10-year lease has a total rental outlay of about a thousand crore rupees, according to business standards. So office space and commercial real estate continue to grow in which includes old properties as well as spanking new ones.
So what have been the big real estate drivers this year and how strong are the trends as we look ahead? I reached out to Anshuman Magazine, chairman and CEO, India, Southeast Asia, and Middle East of CBRE or earlier CB Richard Ellis. CBRE operates in some 100 countries and says it's the world's largest commercial real estate services and investment company and has leadership positions in leasing property sales, outsourcing property management and valuation. It's also the largest commercial property developer in the United States and has over $146 billion of assets under management there.
Back here, I began by asking Anshuman, what was the biggest driver of commercial real estate this year so far and what are the other trends that he was seeing?
INTERVIEW TRANSCRIPT
Anshuman Magazine: Well, there's only one trend, and that is GCC. And I'm sure you've heard this word so many times that you must be tired of listening to it. The fact remains, GCCs are the biggest engine pulling our office market.
Almost 40% of all commercial leasing happening in the marketplace is GCCs. As you know, our office market in India is literally unparalleled currently. There's no other country which is seeing the kind of absorption of office space like India is.
Of course, the US markets are much larger, but generally speaking, we had 79 million square feet of office take-up last year, 60 plus, 64 or whatever previous year. And where we are, these are early days, it is expected that we may equal or actually go beyond 79 million this year. Everything is early days, but we'll be around.
So it's not like a slowdown. And primarily, it's the GCCs who are expanding. And what I expect is that there is still room for growth.
And generally speaking, I mean, I was concerned that the office market has done so well for the last three years. We are slowing down, we're not looking to slow down. So GCCs are buzzing and are actually happening and expanding.
Govindraj Ethiraj: And within GCCs, where would you say the biggest drivers are from? I mean, what kind of companies and is there a sort of average size? Are there some really big deals and small deals?
Anshuman Magazine: Deal-wise, there are two aspects. The people, the companies are already established here. They, of course, take up larger spaces because they've been here for many years.
They've delivered results, which means that you are reducing costs. And it's not only the cost anymore, as you know, that they've been able to deliver services efficiently, especially the US and other countries. The new ones would start with a different aspect, they may take less.
But what is interesting is that besides the usual, we are seeing more activity in life sciences, aerospace, manufacturing, because as the manufacturing increases, you need the back-end work. Financial services, of course, dominates the FSI and GCCs. But we are, like I mentioned, seeing in aerospace and life sciences and manufacturing.
Govindraj Ethiraj: Right. And if you were to look at traditional or IT companies, what is the commercial real estate market reflecting in terms of, let's say, growth between GCCs and IT services companies?
Anshuman Magazine: So, like I mentioned earlier, almost 40% of the contribution to the space take-up is from GCCs. IT, ITS companies are still there. They are BPOs.
But as you know, India is moving up the value chain. And also, AI is going to reduce all the repetitive jobs. And that's why recently there was news that some of the companies are cutting down on their staff because AI has disrupted that kind of work.
And other areas, R&D, for example. So, all of those are taking up and India is overall going up the value chain. Within GCCs, of course, GCCs just means that it is a captive operation for a large company.
But what they're doing within that is what I was talking about, that is going up the value chain and going into new areas. But also, the quality of work being done is just going up the value chain because India, and that is why as we go up the value chain, it becomes less of cost arbitrage, but more of skills. And in many cases, there are in other countries, you don't have as many PhDs, you don't have as many scientists or whatever else R&D research you need.
And I think one of the, of course, challenges would be if our country can churn out those skilled manpower at the pace of the demand. But that's a different discussion.
Govindraj Ethiraj: Right. So, if I can ask you an outlook question. So, at one level, for example, we saw TCS downsizing.
I mean, the number in absolute terms is small. It's 2% of their overall employee base of 600,000 plus. So, it's not much, but it is a reversal in trend.
On the other hand, you're saying that the need really or increasingly will be for more skilled, more qualified people. So, the numbers may not obviously increase the way they've increased or maybe even come down, though the value might increase. But what does that mean or potentially mean for real estate then?
Anshuman Magazine: Frankly, I think real estate may not be impacted as much. It does mean, of course, that people need to upscale. And I think that will happen.
Upscale, sorry. And when they're upscaling, because they need to work. So, that part, I'm sure we will, as a country, keep up the space.
There are two areas where there was a potential threat of office space taking up. The bigger one than AI as of now is employees returning to work. So, in the Western, more mature economies, that is their bigger challenge to get people back to work.
Because it's been a few years, right, in COVID, that lifestyles have changed for people. And the whole way, the entire way of working was hybrid or people working from home or remotely or whatever terms are used, you know, in different locations, et cetera. And it has been in many markets in the West, a challenge to get those people back to work, which means that you need less space.
And then you add AI to it. So, as a combination, it is happening. But so far in India, first of all, we've seen mostly employees coming back to work.
Of course, there are some tech firms where they are working as such because it's cost efficient for them to have people working remotely. And also a lot of people, they can get talent if they offer that. But largely, in most cases, people have come back.
So, if you look at absolute numbers of office space taken up, this does not show that there's been an impact really of AI or coming back to work. But eventually, it will have some impact. But I think in India, it will take longer to have a significant impact or something which will really make a big difference.
Govindraj Ethiraj: So, one quick theme, if I can pick it up, that's data centres. We've seen a lot of action in that space in the last couple of years. And I know it's accelerating.
Could you give us an overview of how you're seeing it right now?
Anshuman Magazine: Yeah, so data centre is certainly the flavour of the season now, and everybody's talking about it. But more than talking, there are data centres being constructed on the ground in India. The challenge is that data centres, A, are very capital intensive.
B, they need a lot of power. And C, also water, right? And land is always the underlying challenge anywhere to do anything, right?
So, all of this, what it means is because of being capital intensive, and what else I've mentioned, the number of data centres scaling up obviously will not be at the pace of logistics or warehousing, which, you know, within nine months, you can pick up a box. It doesn't require so much technology or capital. So, the pace will be slower.
However, we still expect the capacity to double in the next few years. And the good part is that there are quite a bit of new data centres coming up. The government policies are there.
But like I mentioned, largely right now, Mumbai and Chennai, the two data centre hubs with Gurgaon, Noida, Bangalore, everywhere are coming in. If you look at the amount of data which will be churned out in our country of 1.4 billion, with one of the highest mobile penetration, internet penetration, with most governments around the world pushing for data to remain within the country, unlike in the past. So, data centres are not only here to stay, they have huge potential, and the capacities will double and accelerate going forward.
Govindraj Ethiraj: So, let me add a supplementary last question. So, you refer to logistics and warehousing as being a traditional area which is still growing because of demand. So, any numbers you'd like to throw there or insights?
We have all the stats from memory.
Anshuman Magazine: I think 30-35 million square feet of space has been, logistic space has been taken up. Because in the last three years, more than, I would say, maybe almost 80-90 million square feet of space would have been taken up. So, it's from India not having literally any logistics space of quality, and suddenly we see 30-40 million square feet coming up every year of really good international standard warehousing space.
So far, there is still activity. The percentage of increase may slow down because the base is high, but again, logistics is here to stay. And the good part is that now there are large institutions putting in money.
We expect REIT structure to come into logistics sooner than later. But no doubt, our base has now become much larger, and it will continue for some time. And eventually, the percentage increase may slow down, but the volumes will be quite active.
Govindraj Ethiraj: Right. Anshuman, thank you so much for joining me.
Anshuman Magazine: Thank you for having me.
